Predicting the Global Economic Crisis

Brexit & Grexit 2016? (Print Version)

On May 8 the Conservative Party in the UK won an upset electoral victory, gaining an unexpected outright majority of seats in the British Parliament. The big losers in the election were the UK Labour Party and Liberal Party, both of which occupied ‘centrist’ positions in the election, as they both had consistently for the past several years. Big winners were also the Scottish National Party (SNP) and the emerging UK Independence Party (UKIP), both of which championed independence positions—SNP calling for independence from the UK and UKIP from the European Union (EU). Significant support for the idea of breaking from the EU has also been growing within the Conservative Party itself, where a well-organized wing now calls for an outright break from the EU as well.

Two years ago, in 2013, this writer predicted publicly that Britain’s exit from the EU was inevitable. As noted in Z magazine: “more economies in the Eurozone will slip into recession…and the UK will vote to leave the European Union” (Z magazine, ‘Predicting the US and Global Economy, 2013-14’, July 2013).

The logic behind this prediction was that the British economy would continue to grow poorly over the long run. Hot money inflows from foreign investors might temporarily boost London and south England real estate, but it would have little positive impact longer term on the rest of the UK. The UK recovery would prove short and shallow, as it in fact has, registering a meager 0.3% growth rate in its latest quarter GDP. In light of this fact, logic further suggested UK corporations and media would deflect public opinion from the real causes of the poor economic performance, and blame foreign immigrants for the problem, claiming they were responsible for over-loaded public services and for weak job and wage creation. And that’s pretty much what has happened in the interim since 2013.

Party Alignments on Brexit

The UKIP and the Conservatives played the EU-immigration card well in the run-up to the recent election. In contrast, the Labor Party and Liberals did not, failing to raise an effective campaign to convince voters the real problems lay in the pro-corporate, and especially pro-banker, policies of the Conservative party itself. Simultaneously, Labour took a weak position on the matter of remaining in the EU and openly opposed Scottish independence. The Liberals strongly supported remaining in the EU and opposed Scottish independence. Labour was swept from its former northern, Scottish stronghold and lost scores of seats to the Scottish National Party (SNP) which won 56 of 59 seats in Scotland. The Liberals lost mostly to the Conservative Party. The Liberals were virtually wiped out and will likely disappear soon from the British political party landscape. Meanwhile, the UKIP posted a major challenge to the Conservatives, which the latter barely averted.

Although the UKIP did not win significant seats, due to the UK’s peculiar method of assigning seats in parliamentary elections, UKIP won more than 3 million and 13% of the UK popular vote. It also came second in more than 90 of the 650 contested Parliament seats, most of them contested against Conservatives who won. Cameron’s conservatives will not lose sight of the fact the UKIP is poised to take from it a meaningful number of seats in future elections should it, the Conservatives, allow themselves to be outflanked on the EU and immigration issues. They didn’t during the election, and they won’t now on the matter of policy.

What the recent UK election reflects is that centrist conservative and social democratic parties throughout Europe are now in an undeniable decline, giving way either to challengers on the left or on the right depending on political formations and their strategies. As the European economic crisis drags on into its sixth year, European electorates want a solution to the grinding economic stagnation that seems only to benefit investors, the corporate elite, and bankers. And they aren’t getting solutions from centrist parties, like the Labour or Liberal parties in the UK, or their counterparts elsewhere in Europe.
The UK conservative party was able to sidestep the anti-centrist parties’ trend by cleverly leaning right during the election, promising a referendum by voters on the EU and immigration issues if they won. That promise resonated, even if it represents an economic dead end. The Conservatives electoral victory was therefore more a self-inflicted defeat by their traditional opponents, the Labour and Liberals. It’s not so much the Conservatives won; it’s that the more centrist Labour and Liberals lost. The Conservative party will therefore undoubtedly continue to move right on the policy issues in the months to come.

But proposals Cameron will likely raise in his promise to negotiate with the EU are demands the EU cannot, according to the EU Treaty, agree to. EU member states in eastern Europe in particular will vigorously oppose Cameron’s plans. The conservative party gained seats because it was politically astute enough to head off the UKIP on the topic of EU exit (Brexit) and immigration during the election. It is unlikely therefore Cameron and the conservatives will allow the UKIP to continue to outflank them on EU and immigration policy in the months to come. Especially since there’s the matter of the growing wing within the conservative party advocating the same as UKIP.

The SNP was ‘hard’ on the issue of its own independence from the rest of the UK, but up to now ‘soft’ on the matter of EU independence. It is quite possible that it will now shift on the matter of UK independence from the EU. Should Britain exit from the EU, it will serve as a solid pretext for the SNP again raising the necessity for conducting another vote for Scotland’s independence from the UK. Add to that the continued pressure by the UKIP in favor of leaving the EU, the growing vocal minority within the Conservatives in favor of the same, and the now almost silenced voice for EU continued membership by the diminished Labour and Liberal parties, and it is extremely likely that Britain will vote to leave the EU when the referendum is conducted. The question of a referendum is now not whether, but how soon.
Initial talk of a date for the referendum was 2017. But it is more likely to occur in 2016, perhaps even before next summer 2016.

Class Forces & Brexit

Given party alignments and public opinion growing in favor of exit, the deciding factor will be the position assumed on the question of Brexit by British Capital, and especially the politically over-weighted British banking sector that is tightly connected with prime minister, David Cameron, and the Conservative party itself. While some export oriented UK companies are worried about a Brexit, more companies would welcome less competition from EU companies.

Britain’s share of exports to the EU has been declining significantly in recent years, falling from 57% of the UK’s total exports to only 50% in 2014. Britain is clearly trying to ‘pivot’ economically to Asia, China, and elsewhere. It is more interested in attracting Chinese capital than it is in selling more exports to the EU.

Then there’s the British banks. They have already expressed a strong dislike of forthcoming EU banking regulations in the works. Some big Brit banks, like HSBC and Standard Chartered, have already raised a warning they are considering or planning to move headquarters from London. And it is well known that British banks, desperate to remain a global center for banking, want to turn London into a freewheeling center for the more aggressive forms of financial speculation in order to head off growing competitive pressures from rising banking circles in Asia, the Saudi peninsula, and New York.

Not surprising, therefore, Bank of England’s governor, Mark Carney, recently appeared on BBC television calling for Cameron and the new government to hold the referendum well before 2017, urging a vote in the summer 2016. The longer the delay, according to Carney, the more the economic uncertainty. And the UK cannot afford more economic uncertainty, with its most recent GDP at only 0.3% growth and given growing signs the recent artificial real estate and hot foreign money inflow to UK recovery is wearing thin.

Heeding the Bank of England’s warning, prime minister Cameron will no doubt quickly try to negotiate a ‘new deal’ with the Eurozone on immigration and related matters, in the hope of preventing the need to leave the EU altogether. But his plan to renegotiate will undoubtedly fail, as the EU won’t retreat on what will in effect require a revision of the EU treaty itself that could never pass an EU membership vote. Already other EU countries like Poland and Hungary have declared the ‘open immigration’ provision of the EU treaty represents a “red line” (Hungary) and is “sacrosanct” (Poland). Cameron can promise to negotiate all he wants, but he won’t be able to deliver.

To sum up then, UK exit (Brexit) from the EU is just a matter of time, as a result of the recent elections. Cameron and the conservatives won’t allow the UKIP to outflank them on the issue. If they do, next election the UKIP’s 90+ second place seats may well turn into UKIP capturing 50 or more seats from the Conservatives. A growing wing within the Conservatives wants Brexit. Cameron will fail to provide an acceptable negotiated compromise solution with the EU. The party voices for remaining in the EU, the Labour and Liberals, have been significantly muted. And the SNP may very possibly add its voice to Brexit as well, as it strategically reorients itself given its new significant power base.
The key question for the future is what are the implications for a Brexit, if held in mid-2016 and should UK voters to leave the EU? What happens economically to the EU, with the departure of such a major participant? Not likely anything good, in economic terms.

Brexit + Grexit 2016

Brexit also raises questions about Greece remaining in the Eurozone. While Greece’s exit (Grexit) does not appear on the agenda in the short term, it could very well become the case a year from now. A Brexit would almost certainly encourage the forces in favor of Grexit. And the timing may not be totally coincidental.

As Greece’s current negotiations with the Troika (European Central Bank, IMF, European Commission and Eurozone Finance Ministers) approaches the critical month of June 2015 and the expiration of the extension of the past debt agreement at the end of June, the possibility of Greece’s default on debt payments to the Troika appears increasingly likely.

The Troika, and finance ministers in particular, have continued to assume a very hard line in negotiations with Greece. They refuse to provide funding that has been due to Greece under the prior agreement they agreed themselves to extend. Greece must make concessions, while the finance ministers and Troika violate the terms of the prior agreement themselves.

Greece has been ‘scraping the barrel’, as they say, to come up with money to make debt payments that have come due in May. Local government treasuries have been emptied of cash and Greece has borrowed the last of its credit line from the IMF to raise what is additionally needed to make payments in May. But even larger debt payments are coming due in June and July and it doesn’t appear Greece has the funds.

The Troika, in other words, is making Greece bleed and force it to capitulate. What it, the Troika, really wants is for Greece to formally commit before the end of June to the labor market reforms it is demanding Greece implement as a condition for releasing money and funds due Greece under the terms of the old agreement. Labor market reforms int his case means pension cuts, layoffs, and more flexibility for companies to fire workers. Thus far, Greece has resisted.

The current direction of negotiations suggests Greece will more than likely agree to a bad deal at the end of June, in order to avoid a default. But that won’t be the end. The Troika and euro finance ministers will continue to squeeze Greece as future debt payments come due later this summer. Any agreement by June will likely be short term. So more concessions will be demanded, in exchange for future release of funds. The Troika will hold Greece’s ‘hand to the fire’ to ensure it, Greece, continues to implement the labor market reforms and other demands. Agreeing on paper that it will do so, will not prove sufficient for the Troika to release funds. So the interminable negotiating will likely continue.

Meanwhile, the Greek economy will continue to deteriorate further, as it already has begun to do. Late 2014 it appeared to have stabilized. But no longer. It will now get worse. Eventually the Greek people will realize there will be no final solution from negotiations with the Troika. The current crisis represents the new norm. Once that occurs, the only alternative is Grexit. That process of realization could take months, perhaps a year. Perhaps next summer 2016—coincident with the UK’s Brexit. One can only speculate what the convergence of these two possibilities might represent politically, and economically.

Preparing for Grexit

So how might Greece prepare for a possible Grexit? One doesn’t simply declare it is leaving the Eurozone. That’s not how it works. And it’s certainly a formula for economic crisis. An alternative, however, is for Greece to begin to prepare to introduce a parallel currency to the Euro.

A ‘new drachma’ or other currency might be introduced into the Greek economy. Its exchange rate with the Euro should be set higher than the Euro and its introduction include economic measures to ensure the parallel currency assumes, and retains, an exchange rate value greater than the Euro. Perhaps designating the new currency as the currency with which taxes are paid could ensure a demand for it, and thus a higher exchange rate than the Euro. Or the parallel currency might be designated as the currency for all international trading transactions, with the same effect. Releasing the currency slowly to ensure a limited supply could also ensure its greater exchange value. Euros might be used only for payment of past debt to the Troika. That would reduce the demand for Euros internally within Greece, and conversely lower the value of the Euro in Greece in competition with the new currency. Businesses and consumers might then trade in their Euros for the new drachmas. With the convertibility between the currencies favoring the stronger parallel currency, the Greek government could then buy up Euros within Greece, and then make payments to the Troika in what are depreciated Euros. Greece would thus reduce its debt and debt payments in real terms.
Strict controls on outflows of Euros would be required. And if the Troika refused to go along with the plan, Greece could simply pay them what Euros it had left and tell them all Greece has to pay debt with in the future are the ‘new drachmas’. The Troika can either payment with new drachmas or nothing. The Troika could then throw Greece out of a Eurozone that Greece has already effectively already left.

The preceding, of course, represents just one plan for Grexit. The point is that Greece must realize it must develop some kind of plan. The Greek economy will only get worse, given the current scenario of continuing Troika negotiations after June. For the Troika will not let go, and will continue to squeeze Greece until it returns its economy back to the austerity driven depression condition it was in before the January 2015 elections and Syriza’s assuming the government. But then, maybe that’s what the Troika also wants—i.e. to squeeze from Syriza any programs and proposals that differentiated it from its predecessor, Pasok, which was the appendage of the Troika in Greece. Syriza will therefore soon have to choose: does it want to become ‘Pasok Light’, or remain Syriza? Does it want to confront default on July 1, or Grexit in 2016? It doesn’t appear the Troika is willing to give Greece any other choice. Just as the UK will have no other choice in 2016 as well.

The consequences of a dual exit, a Brexit and a Grexit, in 2016 for Europe and the global economy would prove interesting, to say the least.

Jack Rasmus
May 17, 2015

Jack Rasmus is the author of the forthcoming book, ‘Systemic Fragility in the Global Economy’, by Clarity Press, 2015. He blogs at jackrasmus.com. His website is http://www.kyklosproductions.com and twitter handle, @drjackrasmus.

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